PH SOLICITOR NEWSLETTER - MAY 2019

Restraint of trade clauses (or non-compete as they are also known) can be a useful tool for an employer to protect its interests after the employment relationship comes to an end. Restraint clauses can also act as a deterrent for employees seeking and engaging employment with clients or competitors after their employment has ended. However, there are a number of considerations that employers must weigh before including a restraint of trade clause in an employment contract 1 some of which are outlined below.

What is a restraint of trade clause?

A restraint of trade clause is usually contained in a contract of employment. The restraint clause will only come into effect post-employment. However, it does become more difficult to enforce in circumstances where the employer has engaged in conduct that effectively repudiates the employment contract . If an employer terminates the contract of employment, the restraint of trade clause will continue to be enforceable. Likewise, where an employee resigns, the restraint of trade clause will continue to be enforceable.

Restraint clauses, if effectively drafted, can go to protecting the employer’s legitimate business interests in preventing an employee from engaging in work with a former client of the employer, customer or competitor for a period of time, and within a specified geographical location. The restraint clause does not come into effect from the date of notice given by the employee to resign or termination by the employer. Rather, the restraint clause will come into effect at the end of employment.

What is considered ‘legitimate business interests’?

A restraint clause can go no further than what is necessary to protect the employer’s legitimate interests. In some cases, preventing the solicitation of clients of the employer who the employee had specific dealings with during their employment would be considered reasonable. Conversely, a restraint preventing the employee from engaging with any client of the employer (regardless of whether the employee specifically dealt with those clients during employment) would be less likely to be considered reasonable.

What activities are subject to the restraint clause?

The restraint clause may seek to prevent the employee from engaging in the following conduct2 :

i. competing directing with the employer’s business operations, including setting up a business in direct competition;
ii. soliciting or inducing any employees of the employer to leave their employment or interfere with the employment relationship;
iii. soliciting or inducing or attempts to include competition with the employer custom or business of any client of the employer.

What is a “cascading clause”?

A cascading clause is the scope at which the restraint enforces. It includes the temporal and geographical operation as well as the activities that the restraint seeks to prevent. Some contracts will include a cascading clause so that if sought to be enforced post-employment, there are a number of options available for the judge to consider reasonable and enforceable in the circumstances.

While some employers believe that a cascading clause is a better protection, it is not always the best option. An alternative would be to include a specific and narrow location and time for the restraint, which in some cases, may be easier to enforce if a breach occurs. For example, in reference to the restraint activities, an employee may be restrained for a period of 2 months within a 25km radius of the employer’s operating location.

An example of a cascading clause is set out below:

Restraint Area means each of the following areas separately:

i. Australia, or if this restraint area is not held to be reasonable;

ii. The State of Victoria, or if this restraint area is not held to be reasonable;

iii. Melbourne CBD.

Restraint Period means each of the following periods separately:

i. Twelve (12) months from the date of end of employment, or if this restraint period is not held to be reasonable;

ii. Six (6) months from the date of end of employment, or if this restraint period is not held to be reasonable;

iii. Three (3) months from the date of end of employment.

How are restraint of trade clauses enforced?

To determine the reasonableness of a restraint, consideration will be given to the acts that the employee is prevented (or restrained) from doing. Restraints are usually enforced against an employee in relation to their involvement and connection with particular clients of the employer, as well as competitors. However, restraining an employee from engaging in work with an employer will only be reasonable where it does not restrict the employee from earning an income given their specific skills set, and the time that the confidential information an employee has accessed during their employment would remain commercially viable.

In circumstances where an employer believes a former employee has breached their post-employment restraint, time to enforce the restraint clause is important. Some employers elect to send the employee a letter of demand directing them to cease employment and pointing to the operational clause in their contract regarding restraint. However, this may not be effective, and in the circumstances, if the employer is aware of the breach, the alternative remedy is to file an application for an injunction in the court of competent jurisdiction.

It is important to note that evidence of breach is vital in order to pursue injunctive relief, and in some circumstances, damages. If a breach of restraint matter comes before the court for injunctive relief proceedings, it is worth noting that very few of those cases proceed to a final hearing due to early settlement, or discontinuance of proceedings (which may be because the employee stops the breach of the restraint).

Do employers enforce restraint clauses?

There have been a number of decisions in the Supreme Court of Victoria relating to restraints and their enforceability. Some of the published decisions for injunctive relief demonstrates the difficulties that may arise in enforcing a restraint.

In Georges Apparel Pty Ltd v Giardina 3, the employer had a restraint clause for a period of 6 months in relation to competing with the employer’s business. The business was importing and sales of school clothing in Australia. After her employment ended, the employee sought to establish her own business. In the Supreme Court, McDougall J refused to enforce the restraint in its entirety, and instead, held that sufficient protection of the employer was able to be obtained through the return of any confidential information belonging to the employer by the employee, and enforcements of the non-solicitation terms (relating to preventing her approach to other employees).

Where to next?

Restraint clauses are generally found in the contract of employment between the employer and employee. Importantly, if an employee is promoted within the business during the tenure of their employment, the seniority of the employee may give rise to a restraint clause being added, if it was not already in the employment contract.

In some circumstances, the employer may have an opportunity at a later date to include a restraint clause against the employee if they had not already done so in the contract of employment. This may be for example, where there is a settlement agreement between the employer and employee for departure from the business, and a restraint clause can be added in the deed of release. However, this is in limited circumstances, and the preference is for the restraint clause to be included in the contract of employment so as to avoid ambiguity. Due to the nature of restraint clauses, it is recommended that employers have their contracts of employment reviewed, and if required, restraint clauses to be drafted by a lawyer. It is also just as important for employees to understand their obligations to the employer post-employment if they have restraint of trade clauses in their contract of employment.

If you require assistance with drafting or enforcement of restraint clauses, please contact us. Paul and Julia have extensive experience in this area. They can be contacted on admin@phsolicitor.com.au or (03) 9642 0435.

(1)Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181.

(2) This is not a comprehensive list of the extent that a restraint clause can go to prohibiting an employee from engaging in.

(3) [2017] NSWSC 290.

Disclaimer: This article contains information of a general nature and should not be relied upon or taken to be legal advice. You should speak with a lawyer about your situation before applying any of this information.

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